The ongoing debate on the base rate by the BoE
has gained much interest, and has moved the markets in both positive and
negative directions.
BoE’s governor Mark Carney has decided to keep
the interest rates at all-time low, at least for a three year period, until the
unemployment level falls to 7% or low, which currently stands at 7.7%. But
there are chances of the BoE using interest rates as a monetary tool if due to
over spending (which they believe low interest rates would result in) the
inflation rate got out of hand. The markets on the other hand, have reacted in
a different manner and have anticipated a rise in the interest rates soon.
Adding to it, Carney and BoE’s policy makers
have voted against adding to the £375 million as they say that the economic
recovery is on track and the growth in US and Europe has boosted the growth
efforts (the previous UK retail sales numbers saw 0.9% fall). Whether or not, keeping the interest rates low
will result in increased spending will be determined in the near future. The
point to note here is that, people’s incomes are not rising in the manner to
increase spending.
Moreover, low interest rates are favourable for
the government as in helps in servicing its debts. The reason being, that the
current UK national debt has risen to an alarming rate of £1.387 trillion (up
by 7% compared to last year) and is equal to 90% of the entire economy. There
is no possibility of seeing a fall in the level of debt in the near future, but
there is a possibility of seeing the government repaying their debts after a
couple of years, mainly due to the difference between the level of government spending
and government borrowing narrowing down. The gap between the borrowing and
spending peaked at £161 billion in 2009, whereas in 2012 the difference fell to
£98 billion, an 18% fall on average each year.
